Financial inclusion matters for economic growth in India: Some evidence from cointegration analysis
International Journal of Social Economics
ISSN: 0306-8293
Article publication date: 13 August 2018
Issue publication date: 7 January 2019
Abstract
Purpose
The purpose of this paper is to examine the relationship between financial inclusion (FI) and economic growth in India.
Design/methodology/approach
To measure FI, a multidimensional time-varying index is proposed following the Human Development Index method. The long-run relationship between FI and economic growth is examined by using the autoregressive distributed lag (ARDL) approach to cointegration and nonlinear ARDL approach. Further, the direction of causality is investigated by employing the Toda–Yamamoto Granger causality test.
Findings
The linear cointegration test confirms a long-run relationship between FI and economic growth for India. The improvement in both demand-side and supply-side financial services has a positive impact on economic growth. These results suggest that India can attain long-run economic growth by improving the coverage of FI. However, there is no evidence of nonlinear cointegration, indicating that there is no asymmetric effect of FI on economic growth. Further, the causality test shows that FI granger causes economic growth but not vice versa.
Research limitations/implications
The major limitation of the study is the availability of time series data for all important variables. The index for both demand- and supply-side indicators can be extended with several other important variables in later date once the data are available for those variables.
Practical implications
As the study confirms that FI is one of the main drivers of economic growth, it is suggested that the policy maker emphasizing on financial sector reforms can enjoy economic growth in the long run, especially in developing countries. Therefore, the government and policy makers need to address the issues involved in access to financial services to spur economic growth.
Originality/value
The study examines the long-run relationship between FI and economic growth employing ARDL bound testing approach and nonlinear ARDL approach, separately for demand-side and supply-side indicators. Further, the study uses the Toda–Yamamoto granger causality to find the direction of causal flow between FI and economic growth.
Keywords
Acknowledgements
The authors of this paper have not made their research data set openly available. Any enquiries regarding the data set can be directed to the corresponding author.
Citation
Sethi, D. and Sethy, S.K. (2019), "Financial inclusion matters for economic growth in India: Some evidence from cointegration analysis", International Journal of Social Economics, Vol. 46 No. 1, pp. 132-151. https://doi.org/10.1108/IJSE-10-2017-0444
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited